Binary Options, known also as Digital Options or All-or-Nothing Options are not new financial instruments, but thanks to the new technologies, these are now available to the public and present an easier and faster way to make money.
The Digital option term derives from the digital nature of electronic devices which have only two states of being, "on" or "off" as with digital options trading.
When you hold a digital option, you are either in an ―On state indication which means you are in the money or in an ―Off state implying you are out of the money.
The value of the payout (Some brokers offer up To 85% return) is determined at the onset of the contract and does not depend on the magnitude by which the price of the underlying asset moves, so whether you are in the money by $0.01 or $0.05, the payout that you receive will be the same.
Binary Options are sometimes called all-or-nothing trades, meaning that either you are In-The-Money (ITM) and you get the specified payout, or you are Out-of-the-Money (OTM) and you lose your traded amount.
Binary options trading are a fast and exciting way to trade the financial markets. The payout rate trading digital options is high in comparison to any other traditional financial trading.
From the buyer’s perspective, the main advantage of binary options trading is that the Risk taken is limited to the premium that the trader pays up front to take on a binary option position. So in above example, the Risk taken by the trader is limited to $100 in that particular position.
This benefit means that the binary options trader can feel secure in knowing that their downside is limited to their initial trade size. While they can still profit if their market view turns out to be correct, they avoid having to worry about stop loss order slippage or losing their trading discipline.
Furthermore, binary options are a simpler trading vehicle having a limited risk profile since they either pay off a fixed amount or they do not, depending on where the underlying instrument is trading at the binary option’s expiration.
Another advantage is that binaries can often be traded for shorter time frames (1 hour, ½ hour or even 15 min) via binary options trading platforms then are typically available for normal options offered by exchanges.
Several types of Binary Options can now be traded online using a variety of binary options trading strategies.
The most commonly available binary options are“High/Low”also known as“Above” and “Below”or“Call/Put”binary options. Basically, a trader will receive a payout on a long binary option if the market is higher than the strike price of an above binary at expiration, or under the strike of a below binary.
Some online binary options trading platforms also offer“One Touch”above or below binary options that generate a payoff as soon as their trigger level trades in the underlying market… even before the expiration time.
Another popular type of binary option is the“Range or Boundary”binary that is characterized by a range that is compared to the underlying market at the option’s expiration. Typically, an ―in range binary pays off if the market ends up inside the range, while an ―out range binary pays off if the market ends up outside the range.